Dana Galante – Swimming against the tide

Dana Galante

Today’s post is a profile of Guru investor Dana Galante, who appears in Jack Schwager’s book Stock Market Wizards. Her chapter is called Swimming against the tide.

[hr]

This article is part of our ‘Guru’ series – investor profiles of those who have succeeded in the markets, with takeaways for the private investor in the UK.

You can find the rest of the series here.

[hr]

Dana Galante

Dana Galante is a stock shorter who appears in Jack Schwager’s book Stock Market Wizards. (I couldn’t find a photo of her).

  • She runs a fund (Miramar Asset Management) which most of her investors use to balance their long stock investments.

Her fund was popular enough to have been closed to new investment at the time of the interview.

  • She says she is more interested in managing the portfolio than in growing the firm and managing people.
  • Growing her fund would also make it more difficult for her to get out of her positions, which would need to be larger in dollar terms.

Because she exclusively uses shorts, her chapter is called Swimming Against The Tide.

Performance

From 1994 to 1999 Galante had annual compounded returns of 15%.

  • During this period the Nasdaq (which accounts for 80% of her trades) rose by an average of 32% annually, giving an outperformance of 47% annually.

Combining her fund with a long portfolio should lead to better risk / reward performance.

  • This is particularly the case if the short portfolio is funded with borrowed money (leverage – not an approach that I would recommend).

Schwager reports that the worst drawdowns of this combined portfolio during 1994 to 1999 would have been 10% and 5% against 20% and 13% for the nasdaq index alone.

Trading history

Galante has never been obsessed with the markets, like many of the gurus that Schwager has written about.

  • She works out of San Francisco because the time difference with New York and Chicago allows for a better work-life balance.

Galante’s father was a market maker in the OTC market, and Galante helped him during school holidays.

  • Her own career began in the back office of Kingston Capital, an institutional money management firm before she moved to a trading desk as an order entry clerk.

She then became a fund manager – without any experience in stock selection – initially as a co-manager with another inexperienced person.

  • Galante worked for a variety of firms that Schwager describes as “unsavoury” over a period of 14 years.

In one of the firms she sat close to a successful hedge fund manager, and this is how she became interested in shorting, which she felt was more of a challenge than going long.

Most people are afraid to go short because they think the risk is unlimited. That never bothered me. I consider myself pretty disciplined. I always thought that I had a good handle on the risk and that I could get out of any short before it caused too much damage.

Eventually the hedge fund manager left and Galante took over.

  • She founded her own fund seven years later, in 1997.
See also:  Michael Platt - The Art and Science of Risk Control
How to pick shorts

Galante looks for companies that she thinks will have future decreases in earnings, rather than shorting stocks that have already had decreases in earnings.

I look for stocks that are high relative to their value.

This normally means a high PE, but that’s not enough in itself.

  • There also needs to be a catalyst.
  • This tends to be a future decrease in earnings.

One thing I look for is companies with slowing revenue growth who have kept their earnings looking good by cutting expenses. Usually, it’s only a matter of time before their earnings growth slows as well.

Another thing I look for is a company that is doing great but has a competitor creeping up that no one is paying attention to.

Some of her reasoning is top-down (macro).

  • For example, the year that she took over the hedge fund, the Gulf war meant that the oil price went up.
  • This would harm the US economy, so she shorted cyclical stocks.

Galante uses charts for what she calls “market timing”, but sounds like taking profits.

  • She will get out of a stock she is shorting if its price falls to a support level (which she defines as prices where there has been “a lot of buying in the past – points at which prices consolidated before moving higher.”
  • She also gets out of any stocks which are making a new all-time high.

I won’t short a stock that is moving straight up. The stock has to show signs of weakening or at least stalling.

She uses a relatively diversified portfolio, with 2.5% in a single short representing “a fairly large position for me”.

I limit the allocation to any single stock to a maximum of about 3 percent of the portfolio.

There are typically fifty to sixty names in the portfolio spread across different industry sectors.

Red flags

Galante also looks for red flags that might signal that a company is in trouble:

When a company blames the price decline in its stock on short sellers, it’s a red flag. Decent companies won’t spend time focusing on short sellers.

A company that goes from its traditional business to whatever is hot at the time is a red flag.

She quotes gambling and the internet as examples of “crazes” that lots of unrelated stocks jumped onto.

Lots of management changes, particularly a high turnover in the firm’s chief financial officer or a change in auditors is a major red flag.

She also looks for high receivables (large outstanding payments from distributors or customers).

  • This often reflects early sales recognition, and hence dodgy revenues and profits.

We screen for revenue deceleration, earnings deceleration, high P/Es, high inventories, and some technical indicators, such as stocks breaking below their fifty-day moving average.

Conclusions

This was a relatively short interview, with much of the space in the chapter taken up by stories of the disreputable people that Galante worked with before starting her own firm, plus a few shorting “war stories”.

That said, I still found it of interest because I’m not aware of any short-only fund that exists in the UK.

  • If somebody knows of one, please let me know in the comments, because it would be something I’d like to add to my portfolio.
See also:  Michael Masters - Swimming Through The Markets

There aren’t many directly applicable lessons for private investors from this one, since most PIs won’t be interested in shorting.

But if you turn it around, as Schwager suggests, Galante’s methodology gives some good information on which stocks to avoid:

  1. those with high PEs
  2. those with likely reducing earnings (for a specific reason)
  3. those in an uptrend that has stalled or reversed

And if you do fancy shorting, she has some additional “red flags” to help you choose your shorts:

  1. high receivables
  2. change in accountants or CFOs
  3. blaming short sellers for a stock price decline
  4. changing their core business to take advantage of a hot trend

Until next time.

Mike Rawson

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 35 years, with some success.

You may also like...

3 Responses

  1. Avatar Tim says:

    Interesting post Mike.

    I do not sell stocks short, looking for undervalued companies suit my nature much better, but I have done quite a lot of research on short selling.

    In the process I put together a number of tools that can help you find companies to sell short.

    Tools like the James Montier C-Score (cooking the books score) and a low Piotroski F-Score (identifies low quality fundamental companies) a lot more.

    I wrote about them here: http://www.quant-investing.com/blogs/general/2016/06/21/7-ratios-to-find-the-best-companies-to-sell-short

  2. Avatar dana says:

    kynikos associated(biggest short fund) have office in london.

Leave a Reply

Your email address will not be published. Required fields are marked *

Dana Galante – Swimming against the tide

by Mike Rawson time to read: 4 min
More in Wizards
Scott Ramsey
Scott Ramsey – Low Risk Futures Trader

Today's post is a profile of Guru investor Scott Ramsey, who appears in Jack Schwager's book Just One Thing. His...

Close